Is there an energy paradox in fuel economy? A note on the role of consumer heterogeneity and sorting bias

From the previous literature, it can be found that consumers tend to undervalue discounted future energy costs in their purchase decisions for energy-using durables. We show that this finding could, in part, result from ignoring consumer heterogeneity in empirical analyses as opposed to true undervaluation.

► We provide evidence that previous estimates of the energy paradox are downward biased. ► Previous estimates of the relationship between lifetime fuel cost and vehicle price have ignored consumer heterogeneity. ► Heterogeneous consumer sorting across the product space may erroneously suggest undervaluation where none exists. ► Using realistic data generating parameters we estimate the size of the undervaluation with a Monte Carlo simulation. ► Naïve estimation techniques recover undervaluation on the order of previous estimates in the literature.